Local apartment sales could plunge 30% this year

Andrew Schroedter

(Crain's) -- Sales of Chicago-area apartment buildings could drop 30% this year, to $1.8 billion, down from a record-breaking 2007, according to a report from CB Richard Ellis Inc.
"The shift in the capital markets has some people on the sidelines," says John Jaeger, a first vice-president with CB Richard Ellis' multi-family investment group in Chicago. "Some investors are skittish because they can't gauge where the market is."
Even without concerns about a slowing economy, and the prolonged credit crunch, which has made it tougher to borrow money, some decline in sales in 2008 would be inevitable.
"You can't have monster year after monster year," Mr. Jaeger says.
Sales in the city helped propel the Chicago area to a record-setting total sales volume of $2.475 billion. City sales rose 125%, to $1.37 billion, up from about $609 million in 2006. Meanwhile, suburban sales were flat at $1.1 billion compared with 2006.
Signs of the slowdown were evident late last year. Sales activity typically spikes late in the year, as investors hurry to complete deals before the yearend.
Only 42% of the Chicago deals closed in the second half of last year, as opposed to

(Crain's) -- Sales of Chicago-area apartment buildings could drop 30% this year, to $1.8 billion, down from a record-breaking 2007, according to a report from CB Richard Ellis Inc.

(Crain's) -- Sales of Chicago-area apartment buildings could drop 30% this year, to $1.8 billion, down from a record-breaking 2007, according to a report from CB Richard Ellis Inc.

"The shift in the capital markets has some people on the sidelines," says John Jaeger, a first vice-president with CB Richard Ellis' multi-family investment group in Chicago. "Some investors are skittish because they can't gauge where the market is."

Even without concerns about a slowing economy, and the prolonged credit crunch, which has made it tougher to borrow money, some decline in sales in 2008 would be inevitable.

"You can't have monster year after monster year," Mr. Jaeger says.

Sales in the city helped propel the Chicago area to a record-setting total sales volume of $2.475 billion. City sales rose 125%, to $1.37 billion, up from about $609 million in 2006. Meanwhile, suburban sales were flat at $1.1 billion compared with 2006.

Signs of the slowdown were evident late last year. Sales activity typically spikes late in the year, as investors hurry to complete deals before the yearend.

Only 42% of the Chicago deals closed in the second half of last year, as opposed to 69% in the last six months of 2005, the previous record year, with total sales of $1.893 billion, CB Richard Ellis says.

The local dropoff mirrored the nationwide trend, which saw sales of significant apartment properties drop 60% in the fourth quarter of 2007 compared to 2006, according to New York research firm Real Capital Analytics Inc.

In one little-noticed Chicago suburban transaction that closed in July 2007, New York-based J.P. Morgan Chase & Co. acquired a joint-venture interest in the 640-unit Woodland Creek Apartments in Wheeling in a transaction that valued the complex at $96 million, or $150,000 per unit.

Houston-based Finger Cos., which developed the complex in 1982, retains an ownership stake. The deal, financed with a $67-million loan by New York Life Insurance Co., sets the stage for major renovation, says Marvy Finger, president and CEO of Finger Cos.

As demand in the city grew, so did prices, with the average unit price increasing 85% to $274,370, up from $148,191 in 2006.

That price growth may not be sustained this year, says Bruce Wechsler, president of Chicago-based Wexenthaller Realty Management Inc., who sold a $122.5-million portfolio of North Side apartment properties last month.

"I see a mild softening, maybe 3 to 5%," says Mr. Wechsler, who is also president of the Chicagoland Apartment Assn. "There's some uncertainty, and uncertainty leads to a softening of price. The threat of recession could also soften prices."

Institutional buyers accounted for about 65% of the area's transactions last year. Because these typically low-leveraged buyers aren't as affected by the turmoil in the capital markets, their demand for apartment properties should remain strong, preventing a steeper decline in sales than some observers expect, Mr. Jaeger says.

"There's money out there waiting to be placed," he says. "Because we've had a slower start, you're going to see pent-up demand eventually kick in. Investors are in the market to invest, not put money in 30-day Treasuries."